Greek Euro Exit Would Be A Benefit, So Why Is Samaras Warning Of The Risk?

One of the little puzzles about politics as it is actually done is that all too often we’ve got politicians standing up and warning us against therisk of something that would actually be very good for us and the economy. And so it is with the Greek Prime Minister, Samaras, warning voters that there’s a risk that a Syriza vitory could lead to Greece’s exit from the euro. I am not, in any manner, a supporter of Syriza or of other such leftwing parties, but a Greek exit from the euro would be beneficial to Greece, Greeks and the Greek economy. So why warn against the “risk” of it happening?

Here’s the report:

Greece’s political parties embarked on a flash campaign for elections in less than three weeks that Prime Minister Antonis Samaras said will determine the fate of the country’s membership in the euro currency area.

Samaras used a Jan. 2 speech to warn that victory for the main opposition Syriza party would cause default and Greece’s exit from the 19-member euro region, while Syriza leader Alexis Tsipras said his party would end German-led austerity. Der Spiegel magazine reported Chancellor Angela Merkel is ready to accept a Greek exit, a development Berlin sees as inevitable and manageable if Syriza wins, as polls suggest.

It’s worth taking a little step back here and considering the economic situation without the interference of European Union politics. Greece is, as a nation, effectively bankrupt. The public debt is of such size that it simply cannot ever be repaid. However, nations do not go bankrupt. So, some other solution must be found. And over the centuries we’ve worked out what is the appropriate treatment in such cases. Of course, some of it is that the debt needs to be renegotiated. Just as with a commercial organisation that goes bust, the people that lent it the money only get some of it back, so the same is true of a country. Oh dear, sorry, you’ve lost some of your money. Tough and better luck next time.

But that’s not all that happens. Even when we had the gold standard, more so under Bretton Woods, and at the heart of every IMF stabilisation programme since, has been the idea that a country must also devalue its currency in order to regain some sort of competitiveness. The alternative to such a devaluation is that the country must undergo a grinding internal devaluation of wages and thus prices. And as Keynes rightly pointed out this isn’t a happy process. We all have very firm opinions about what happens when our nominal wages decline. Yet that’s what has to happen in such an internal devaluation. Far better, far easier, causing much less pain, is to devalue the currency in a once off transaction.

Thus countries in the 1930s left the gold standard and after some 12 to 18 months found that they were recovering nicely. That’s certainly what happened to my native UK in that time period. They were even able to bring public spending and the deficit under control at the same time.

The same would be true of the Greek economy if a devaluation were possible. But, of course, being in the euro means that one is not. And that, in turn, is why Greece leaving the euro would be such a good idea. Yes, obviously, it would be chaotic and the first few months would not be pretty. But the standard economic prescription for what ails the country is devaluation. Given that membership of the euro is incompatible with this then the country should not be in the euro. QED.

Which is what makes Samaras’ warning so odd. It’s not that there’s a risk of a Syriza victory leading to Grexit, it’s that a victory for anyone else leads to the risk that there won’t be Grexit.

As at the top I’m not a supporter of Syriza or of any similar parties (like Podemos in Spain, Die Linke in Germany and so on) but the best thing that could happen to the Greek economy right now is leaving the euro. So why should anyone consider it a “risk” if that becomes more likely?